Watch out for commodities and emerging markets

March 16, 2009

Matt McCall is the president of Penn Financial Group, the editor of the ETF Bulletin and a leading markets analyst on the Fox Business Network. He spoke recently with the editors of HardAssetsInvestor.com about commodities and where to position your portfolio for 2009.

HardAssetsInvestor.com (HAI): It's been a challenging market to say the least, Matt. Where have you been positioning your portfolio these days?

Matt McCall, president, Penn Financial Group (McCall): It has been a challenging market, for sure, but we've been hanging in there. We were just running reports, and our clients are between flat and down 4% this year. We're pretty happy with that, considering the markets are down about 17%.

The reason we've been doing well on a relative basis is that we still have a big cash position. Also, our largest single holding is GLD [NYSE Arca: GLD], the gold bullion ETF. This market has been all about staying diversified and being willing to sit on your cash until it's time to put money to work again. We have been scaling into positions little by little, but we haven't been going wholeheartedly into the market yet.

HAI: What will make you jump full bore into the market?
McCall: That's the big question, isn't it? What is the catalyst to put in an absolute bottom? The answer is, I don't think there is one catalyst that will drive this market forward.

When the time comes, I'm going to use a technical move to know when to get in. There's a lot of noise in the market right now. Over the past few days, we've seen the market moving upwards because of what the CEOs of a few financial companies are saying. But if we listened to those same CEOs a year ago, we would have bought Citigroup at $30/share. What's to say we can trust them now?

I think the turning point will be more technical than fundamental. I don't think we'll see a big blow-off capitulation at the bottom, but a slow capitulation that just kind of gives up on the market. That's what I'll be looking for.

HAI: Let's turn back to the positions you do have in the market, like GLD. What's driving that allocation?
McCall: We bought GLD at $65/share about two years ago, when gold was in the mid-600s [per ounce]. The reason we bought it at that time was that I was looking for inflation to become an issue. The reason I'm still holding it and have added to it recently is that I'm still concerned about inflation.

There's a big argument on the Street right now about inflation versus deflation. I'm a big believer that when the government is promising to spend $3 trillion, inflation will take hold eventually. We like gold in that scenario.

Gold is also a safe-haven asset. And with all the turmoil in the financial markets right now, that makes it attractive to people. As long as people believe in gold's safe-haven status, it's something I want to have in my portfolio.

The other piece of the story on gold is diversification. You want to diversify your portfolio, especially given the difficult times we have been going through. Gold adds diversification, lowering the overall risk.

HAI: Gold stocks have been hot recently. What's your take there?
McCall: I own some gold stocks: Gold Corp and AEM. The biggest exposure we have to gold stocks is through the Market Vectors Gold Miners ETF [NYSE Arca: GDX]. It's something that I've owned for quite some time. Gold stocks have under-performed gold recently, but I still think you have some great opportunities.

If I had to choose between the two, I'd own GLD. It's more of a pure play. You're not betting on any management decisions or hedging decisions at the corporate level. But right now there is a disconnect between GLD and GDX. The last time gold was at $1,000/ounce, GDX was trading in the 50s. Today, GDX is in the mid-30s. I think that gap will close, and GDX will perform well later this year.

HAI: What about oil? Oil's all over the place. What's the outlook for oil here?
McCall: I believe oil will go back to triple digits sometime in the next 18-24 months. I have not placed a major bet as of yet, however, so I'm not putting my money where my mouth is.
I do own some oil stocks, mostly in the biggest names, like Exxon-Mobil and Petrobas. But I haven't made a big bet yet on the underlying price of oil using ETFs. I probably will soon: I've been watching oil put in a base over the past few months. But I haven't seen the kind of breakout that I would look for before putting money into something like USO [the US Oil ETF] or USL [the US 12-month Oil ETF].

HAI: Does natural gas have a chance of ever getting up off the mat and delivering positive returns?
McCall: I really think it will. Eventually, it will come down to supply and demand. Right now, supply is outweighing demand. But as we move forward and see alternative energy demand grow - both with what T. Boone Pickens is doing and with the administration's efforts - I think we will see increased demand for natural gas. As that happens, we'll realize that the recent slowdown in investment in the natural gas space is going to catch up with us.

Right now, you're trying to catch a falling knife in natural gas. I did put a small bet on natural gas last week in one of our newsletters. I'm down on that right now, but we'll see how it plays out. It's one of our longer-term plays.

HAI: What about ags and softs? A lot of people look to ags and softs during recessions. Any interest there?
McCall: I do not have any positions right now in ags or softs. I had some positions in the past, but I'm holding off here. The ags definitely appear to be putting in a base, but I don't want to jump in too early. Generally, in this market, I'd rather be late and pay up 10-15% than be too early.

I do think that a long-term play on ags based on growth in emerging markets makes sense. As the middle class grows, you'll see a pickup in demand. Right now, the emerging markets global growth story has been put on hold, but it will come back.
If you're a long-term investor picking up some shares of DBA, that's probably not a bad idea. We're probably close to a bottom. But personally, I'll wait for the market to come back a bit.

One thing that has been doing well is agricultural stocks. The agribusiness ETF [NYSE Arca: MOO] made a bottom in November, and right now, we're holding 20% off of those lows, so we're seeing some promise right there.

HAI: Are you more or less invested - and more or less interested - in commodities today as compared to two or three years ago?
McCall: We're definitely interested in and invested in commodities. I will probably become more heavily invested in commodities in the future. Once we find a bottom, the two sectors I'm looking at investing in heavily are emerging markets and commodities. I think commodities have been taken down irrationally. They were irrationally high at the top, and are irrationally low here at the bottom. I haven't jumped in yet because the market can stay irrational longer than I can stay solvent. But once this market takes off, I think commodities from gold to ags will be the place to be.

HAI: Any last tips for HardAssetsInvestor.com readers?
McCall: Only this: My most recent purchase was silver via the iShares Silver Trust [NYSE Arca: SLV]. We've seen a bit of separation recently between the price of gold and the price of silver. I think that gap gets filled. Even though I'm long gold, I think that will get filled.
The thing people don't realize is that silver production is a derivative based on the production of other base metals. Base metal mining has slowed down sharply due to the economy. And believe it or not, demand for silver increased last year. So I think that will come full circle and you will see silver up in the high teens by the end of this year. [Editor's note: It's currently trading near $13/ounce.]

Courtesy: (www.hardassetsinvestor.com)

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